IP KAM FAT v. CHO KIN TAK

DCCJ 14306/2000

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 14306 OF 2000

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JUDGMENT

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INTRODUCTION

1.  This is an action on a dishonoured cheque.  The cheque in question was drawn by the Defendant and dated 1 September 2000 for cash in the sum of HK$173,000.

2.  The defence is essentially that of conditional delivery of the cheque.

3.  Pertinent to the defence, parties embarked on an extensive dispute with respect to the dealings between the Defendant and Hu Mei, Windy (“Hu”) of one part and the Plaintiff of the other part during the first half of 2000.

BACKGROUND

4.  The Plaintiff’s group of companies (“Wheeler”) carried on business in relation to the sale of silicone products as well as waterproofing materials, works and services.  Wheeler consisted of Wheeler Trading Co. (HK) Ltd. (“WTC”), Wheeler Enterprises and Engineering Ltd. (“WEE”) and Wheeler Waterproofing (S&C) Ltd. (“WW”) in Hong Kong as well as a Mainland company.

5.  The Plaintiff was the founder and the majority shareholder and director of Wheeler.

6.  Hu and the Defendant started to work for the Plaintiff in 1979 and 1981 respectively.  The Defendant left Wheeler in 1987 but rejoined the group in 1993.  The Defendant and Hu were also directors of some of the companies in the group.  Immediately prior to their resignation in 2000, the Defendant and Hu were respectively the Assistant General Manager and the General Manager.

7.  In 1988, the Plaintiff emigrated to Canada and spent less time in Hong Kong.  Since the mid 90’s, the Defendant and Hu had been heavily involved in the daily operation of Wheeler.

8.  In about April 2000, Hu and the Defendant started to form another company in Hong Kong by the name of Oriental Gateway Enterprise Limited (“OGEL”).

9.  By May 2000, the employees of Wheeler were laid off.  The Defendant and Hu also resigned afterwards.

10.  By letters signed by the Plaintiff and dated 2 May 2000, WEE and WTC notified their customers/suppliers that they appointed OGEL as their authorised distributor and representative.  OGEL would fully undertake, handle and process all their business transactions, products and services.

11.  Letters signed by the Plaintiff and dated 2 May 2000 were also sent on behalf of WEE and WW to the customers/suppliers.  According to the letter, all the trading and marketing services would be handled by OGEL while all the engineering and contracting services would be handled by WW.

12.  All these appointments and arrangements basically took immediate effect.

13.  However, on 16 June 2000, WW, WEE and WTC, through their solicitors then, suddenly terminated the appointment of OGEL as the authorised representative with immediate effect.  The customers/suppliers of Wheeler were notified of such termination on the same day and thereafter in July.

14.  The above background is not in dispute.

THE CHEQUES

15.  The dishonoured cheque was one of 3 cheques drawn by the Defendant and handed over to the Plaintiff on or about 1 June 2000.  The Defendant’s cheques were post-dated 1 September 2000.  In return, the Defendant obtained another 3 cheques drawn by the Plaintiff on 2 June 2000.

16.  The Plaintiff’s cheques were for cash in the amounts of HK$150,000, HK$150,000 and HK$73,000 respectively.  The Defendant’s cheques were also for cash in the amounts of HK$100,000, HK$100,000 and HK$173,000 respectively.  In other words, the Plaintiff’s cheques dated 2 June 2000 and the Defendant’s cheques dated 1 September 2000 were for the same total amount of HK$373,000.

17.  The Plaintiff’s cheques for the total sum of HK$373,000 were deposited into the Defendant’s bank account on the same day of the cheques, i.e., 2 June 2000.

18.  On 1 September 2000, the 2 cheques for HK$100,000 from the Defendant were honoured whereas the cheque for HK$173,000 was not.  Upon repeated presentment, the cheque remained dishonoured.

19.  There is no dispute that the Defendant countermanded payment.

THE FACTUAL DISPUTE

20.  The Defendant’s contention of condition delivery of his cheques was based on the following circumstances.

21.  In about early February 2000, the Plaintiff expressed his desire to retire.  The Defendant and Hu agreed to take over the marketing of the stock of goods of Wheeler.  This led to the formation of OGEL and Wheeler’s appointment of OGEL as authorised representative of the group.  As part of the arrangement, OGEL would purchase part of the stock of goods of Wheeler.

22.  The Plaintiff agreed to provide the Defendant with the funds necessary to enable OGEL to pay forthwith for the goods then to be delivered by Wheeler to OGEL.  As between the Plaintiff and the Defendant, the latter would have 90 days to repay the amount.  This led to the mutual issuing of the cash cheques by the Plaintiff and the Defendant.

23.  It was allegedly the common intention of the parties that the Defendant’s 3 cheques were delivered to the Plaintiff conditional upon a 90-day credit period for the payment of the goods to be delivered as well as the due delivery by Wheeler of all the goods paid for by OGEL.

24.  There was also said to be an express or implied condition that Wheeler would consent to and render support with regard to the onward sale by OGEL of those goods pursuant to this arrangement.

25.  The Defendant complained that some of Wheeler’s goods already paid for by OGEL under this arrangement were not released from Wheeler’s warehouse.  Further, due to Wheeler’s letters to the customers/ suppliers allegedly disparaging the Defendant and OGEL, one of the suppliers, ICS/Penetron International Ltd (“ICS/P”), failed to confirm the right of OGEL to be the authorised distributor of its products.  Without ICS/P’s warranty, OGEL was unable to sell some of these goods purchased from Wheeler.

26.  On such basis, the Defendant argued that the conditions precedent to delivery of the cheques were not fulfilled and therefore the Plaintiff was not entitled to present them.

27.  The Plaintiff denied that he had the plan to retire or to dispose of the stock of goods of Wheeler.  He alleged that there was an oral agreement in March 2000 for the transfer of WW to Hu and the Defendant which they had failed and refused to complete.  The 2 May 2000 letters of appointment in favour of OGEL were allegedly obtained by misrepresentation on the part of the Defendant and Hu.  They had removed Wheeler’s properties and business files to OGEL allegedly without the Plaintiff’s consent.  Wheeler’s goods had been sold to OGEL allegedly at undervalue.  These led to Wheeler’s termination of OGEL’s appointment.

28.  These complaints formed part of the basis of the allegations of breach of fiduciary duty and duty of good faith owed by the Defendant and Hu to Wheeler.  On such basis, another High Court action was commenced in 2002 by WW and WEE (but not WTC which had been wound up since 2001) against the Defendant, Hu and OGEL (“the High Court Action”).

THE ISSUE

29.  The factual dispute in the present case therefore substantially overlapped with that in the High Court Action which is still pending.

30.  It should be noted that the defence to the present action on the dishonoured cheque is actually a limited one.  Mr. Leung for the Plaintiff also took issue with respect to the admissibility of the Defendant’s evidence which, he argued, contradicted the contracts in the cheques.  In the circumstances, Mr. Leung for the Plaintiff and Mr. Vaughan for the Defendant agreed that it would be unnecessary and undesirable for me to make findings in respect of those factual allegations which should properly be saved for the tribunal in the High Court Action.  They requested me to make findings which are really relevant to this action.

31.  The really relevant dispute boils down to the key question of whether the Defendant’s allegations constituted a true case of conditional delivery of his cheque(s).

THE APPLICABLE PRINCIPLES

32.  There is no dispute as to the applicable legal principles.  A cheque is an unconditional order in writing requiring the banker to pay on demand money in a certain sum: sections 3 and 73 of the Bills of Exchange Ordinance, Cap.19 (“the Ordinance”).  The drawer of the cheque engages that on due presentment, the cheque will be paid according to its tenor.  Extrinsic evidence is generally inadmissible to prove that the terms of the contract are different from those expressed in writing in the cheque: see S Y Chan Ltd v Choy Wai Bor [2001] 3 HKLRD 145.

33.  Evidence is however admissible to show that there was no delivery of the cheque.  Section 21 of the Ordinance provides that:

“(1) Every contract on a bill, whether it is the drawer’s, the acceptor’s or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto:

……

(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery-

(a) [not relevant for the present purpose]

(b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill;

……

(3) Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.”

34.  For this purpose, it is important to distinguish a true case of conditional delivery from one which is not.  In Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes (16^th ed.) at 2-153, the learned authors say:

“The defect in delivery may be established by oral evidence.  The parol evidence rule (see below) does not apply.  This is in conformity with the common law which admits oral evidence to show that what purports to be a written contract is no contract at all or to prove an agreement that a written contract is not to come into operation until a certain condition is fulfilled.  In practice, however, it may be difficult to distinguish between situations where it is orally agreed that the bill is not to become operative pending the fulfilment of a condition (in which case oral evidence of the conditional delivery will be admitted) and situations where the bill is delivered operatively but subject to an oral agreement in defeasance of a party’s liability on the bill (in which case oral evidence to qualify the terms of the written instrument will normally not be admitted).”

THE CONTRACT IN THE CHEQUE AND THE SALE OF GOODS

35.  The Plaintiff’s case is that his cheques were delivered as a simple personal advance to the Defendant.  The Defendant argued that this is incredible.

36.  First, when the Defendant received the Plaintiff’s cheques, he also received substantial long service payment upon his resignation.  It was argued that there was no reason for the Defendant to ask then for another loan for himself.

37.  Second, according to the Plaintiff’s own case, the Defendant and Hu had allegedly delayed in completing the transfer of WW and in paying the agreed consideration of HK$300,000 since March 2000.  It was incredible, the Defendant argued, that the Plaintiff would further agreed to advance HK$373,000 to the Defendant without even ascertaining why such loan was requested and why the loan was in such amount.

38.  Third, the Defendant referred to documents which show that the Plaintiff’s cheques were deposited into the Defendant’s bank account.  The sum of HK$373,000 was then transferred from the Defendant to OGEL.  OGEL paid HK$369,368.50 to WTC and HK$3,850.10 to WW.  The total amount paid to Wheeler was HK$373,218.60.  All these happened on the same date as that of the Plaintiff’s cheques.

39.  The Defendant argued that such evidence supports his case that the Plaintiff’s cheques were for the Defendant to fund OGEL’s immediate payment of the cost of the goods to be delivered by Wheeler to OGEL.  The sum of HK$373,000 was the total cost of the goods to be delivered ascertained and just rounded up for the Plaintiff to draw his cheques on 1 June 2000.  The post-dating of the Defendant’s cheques reflected the effective 90-day credit period which OGEL would have enjoyed.

40.  Fourth, the Defendant referred to a previous similar arrangement on 23 May 2000 involving HK$453,754.90.  Relevant cheques and invoices were referred to.  Only that on this previous occasion, the Plaintiff’s cheque was drawn in favour of OGEL directly and the Plaintiff was repaid by OGEL accordingly.  Further, the credit period was 30 days which was reflected by the difference between the date of the Plaintiff’s cheque (23 May 2000) and that of OGEL’s cheque (22 June 2000).

41.  In respect of this arrangement in May 2000, the Plaintiff’s explanation was that this was another personal loan to OGEL.  However, according to the Plaintiff’s own case, he had discovered by then various alleged misconducts on the part of the Defendant and Hu.  It would appear to be unusual for him to agree to extend a loan to OGEL notwithstanding such alleged grievance about the Defendant, Hu and OGEL.  Further, the Plaintiff was not really able to explain the purpose of the loan and the reason for the odd amount involved on this previous occasion (if it was not for enabling OGEL to pay for Wheeler’s goods).

42.  In the evidence, there were also invoices signed by the Plaintiff evidencing the sale and delivery of Wheeler’s goods to OGEL from May to June 2000.

43.  Considering these circumstances, I do believe that the money obtained from the Plaintiff on the previous occasion in May 2000 was to enable OGEL to pay for Wheeler’s goods.  I also believe that the money the Defendant obtained by means of the Plaintiff’s cheques on this occasion in June 2000 was to enable OGEL to pay Wheeler forthwith for the cost of the goods to be delivered to OGEL.

44.  However, all these might explain the purpose of the Plaintiff’s advances on the previous occasion in May and on this occasion in June 2000.  The fact that the money was intended by the Defendant, or even understood by the Plaintiff, to be used by OGEL to pay for Wheeler’s goods did not alter its nature as an advance by the Plaintiff to OGEL on the previous occasion and to the Defendant on this occasion.

45.  In my judgment, the sale of goods was between Wheeler and OGEL whereas the provision and repayment of money to facilitate such purpose was between the Plaintiff and the Defendant.  This was an advance by the Plaintiff to the Defendant personally and therefore it was the Defendant’s obligation to repay.  This led to the Defendant’s 3 personal cheques including the cheque for HK$173,000 in question.

46.  In the letter from the Defendant’s solicitors dated 30 August 2000 (in the third paragraph), the nature of the Plaintiff’s cheques to cover the amount of the Plaintiff’s advance, albeit for enabling the Defendant to fund OGEL to pay for Wheeler’s goods, was not disputed.

THE ALLEGED COMMON INTENTION

47.  According to the Defendant’s pleading, it was the common intention (and therefore not express agreement) of the parties that his repayment and the operation of his cheques for such purpose were subject to the following conditions precedent:

(1) There was a 90-day credit period.

(2) All the Wheeler’s goods paid for were delivered to OGEL.

48.  Whether the alleged continued support of Wheeler with respect to these goods sold to OGEL was also a condition precedent to the operation of the cheque was not perfectly clear from the pleading.  It was pleaded that the withdrawal of such support by Wheeler had caused that some of ICS/P’s goods purchased by OGEL became idle or non-saleable.  On this basis, it was also contended that the Plaintiff was not entitled to present the cheques.

49.  In his submissions, Mr. Vaughan for the Defendant did not seem to refer to the 90-day credit period as such a condition precedent.  Complete delivery by Wheeler of all the goods paid for by OGEL remained as one alleged condition precedent to the operation of the cheques.  Mr. Vaughan did refer to the continued support of Wheeler with regard to the onward sale of the goods purchased by OGEL as such a condition precedent too.

50.  Mr. Vaughan added that in other words, the condition was that the Plaintiff was to perform his alleged promises to the Defendant and Hu when they agreed for him to retire and for OGEL to take over the business concern and stock of Wheeler.  However, this broad reference to the alleged dealings amongst the parties at the material time as a condition precedent to the operation of the cheques is not adequately, if at all, covered by the Defendant’s pleading.  Therefore I would not treat this addition as anything more than Mr. Vaughan’s interpretation of the 2 other alleged conditions precedent he referred to in his submissions.

The 90-day credit period

51.  As I said, Mr. Vaughan for the Defendant did not seem to argue anymore about this pleaded condition precedent.  This, if argued, would not have succeeded anyway.

52.  According to the Defendant, he originally requested 90 days for OGEL to pay for Wheeler’s goods.  By the arrangement of the Plaintiff’s advance to the Defendant, OGEL was able to pay Wheeler forthwith instead.  The credit period were then transformed into the credit period for the Defendant’s repayment of the Plaintiff’s advance.  The Defendant’s pleading also reflects that understanding between the parties.  This explained why the Defendant post-dated the cheques to 1 September 2000 in the first place.

53.  Therefore, the 90-day credit period was not an extrinsic condition precedent to the operation of the cheques.  It was reflected by the actual term of the contract in the cheque, i.e., the postponed maturity date.

Complete delivery

54.  There was no suggestion that each of the Defendant’s cheques represented the amount of repayment referable to a specific lot or quantity of Wheeler’s goods already paid for by OGEL.  Therefore, if the alleged condition precedent of complete delivery of the goods were true, any short delivery of the goods paid for would not constitute valid delivery and would have prevented all 3 cheques issued by the Defendant from operating.

55.  The Defendant indeed alleged short delivery.  However, OGEL never sought to reject all the goods delivered and the Defendant never sought to countermand all the cheques.  The reality was that OGEL kept most of the goods already delivered and the Defendant countermanded only the cheque for HK$173,000.

Continued support of Wheeler

56.  Insofar as the continuation of such support was said to be a condition precedent to the operation of the cheques, I wonder how and when such a condition precedent would be considered as fulfilled.

57.  So long as OGEL still retained some of these goods for onward sale, Wheeler’s continued support, according to the Defendant, would be necessary or else these goods would become non-saleable.  In that case, the cheques would not be operative unless and until these goods had been successfully sold.  This could hardly be a matter of common intention of the parties.

The 30 August 2000 letter

58.  Since the dispute in June 2000, the first time the Defendant stated his position with respect to his cheques was through his solicitors by letter dated 30 August 2000, i.e., 2 days before the maturity of the Defendant’s cheques.

59.  As mentioned above, the letter did not seek to dispute that the Plaintiff’s cheques dated 2 June 2000 were to cover the amount of the Plaintiff’s advance to the Defendant to enable OGEL to pay forthwith for Wheeler’s goods (to be delivered).

60.  In the letter, the Defendant complained about the short delivery by Wheeler of the goods already paid for by OGEL.  It was stated that the Defendant therefore felt that it was within his rights to countermand payment on the cheques.  The letter also referred to the alleged continued support by Wheeler with regard to the onward sale of the goods purchased by OGEL.  That was said to be the basis on which the price (or probably the profit margin) of those goods sold to OGEL was agreed.

61.  There was no suggestion in the letter that complete delivery of the goods or continued support of Wheeler was condition precedent to the operation of the cheques.  Nor was there suggestion that such alleged condition precedent was a matter of common intention of the Plaintiff and the Defendant at the time of exchange of their cheques.

62.  The letter then set out the goods allegedly not delivered and those delivered but allegedly could not be sold.  It followed by suggesting deducting the cost of these goods from the amount repayable by the Defendant.  The Defendant admitted liability to the extent of HK$255,733.20.  He tendered payment by offering to honour his 2 cheques for HK$100,000.  As to the remaining cheque for HK$173,000, the Defendant would countermand payment.  In place of that, the Defendant tendered a cheque for HK$55,733.20 drawn by OGEL in favour of the Plaintiff dated 1 September 2000.

63.  Since OGEL had already paid Wheeler in full for the goods to be delivered, what the Defendant was proposing by this letter was effectively to reduce the amount of his repayment of the Plaintiff’s advance and therefore the amount of the Defendant’s cheques.  Understandably, and on the following day, the Plaintiff rejected the Defendant’s tender and the substitute cheque.

64.  Notwithstanding that, the Defendant selectively countermanded only the cheque in question (though all 3 cheques were allegedly not operative).  According to Mr. Vaughan for the Defendant, it would be for Wheeler to pursue OGEL for the remaining amount as cost of goods sold and delivered.  I could not agree with such contention.

The pleading

65.  The Defendant’s original pleading (in 2000) also reflects his case as stated in his solicitors’ letter dated 30 August 2000 and nothing more.  The allegation of the “common intention” of condition delivery of the cheques did not appear until the amended pleading was filed in October 2005.

Admissibility of the Defendant’s evidence

66.  In Suen Ho Sun v Kamenar International Ltd [1989] 1 HKC 135, the defendant sought to adduce evidence of a mutual understanding between the plaintiff and the defendant that the drawing and delivery of the cheque in question was subject to a condition precedent that the plaintiff would only be paid on the cheque if the goods supplied by the plaintiff were accepted by the defendant’s overseas buyer and that the plaintiff would not present the cheque for payment unless and until that was confirmed.

67.  The Court of Appeal in Suen Ho Sun found that there was no such condition at all.  The cheque, as it stood, was an unconditional order in writing by the defendants to their bankers to pay the sum named to the plaintiff on or after the maturity date.  When all these oral conditions were read into it, the effect became quite different.  It became a conditional order to pay, conditional upon acceptance of the goods by the sub-buyer.  It was not an order to pay on or after the maturity date but became an order to pay only after such acceptance happened and was communicated.

68.  In Lui Po Nam v Century Regal Ltd HCA 9587 of 1999, 28 December 1999, Sakhrani, J, the defendant delivered to the plaintiff post-dated cheques for the cost of the goods to be delivered.  The defendant’s attempt to adduce evidence of delivery of cheques conditional upon the goods supplied being inspected and confirmed to be of merchantable quality was rejected.

69.  Both cases were referred to in the case of S Y Chan & Ltd cited by both parties.

70.  Mr. Vaughan for the Defendant argued that the present case is unique.  To me, the unique feature of this case appears to be this: Unlike a case where the drawer of the cheque seeks to subject the operation of the cheque to the performance of the underlying contract between the drawer and the payee, the Defendant here even seeks to subject the operation of the cheques (as repayment of the Plaintiff’s advance to the Defendant) to the performance of the sale of goods contract between different entities, namely, Wheeler and OGEL.

71.  In my judgment, this was not a true case of conditional delivery of the cheques.  The Defendant was effectively attempting to vary the terms of the contract in the cheques.

72.  Mr. Vaughan for the Defendant argued that the Plaintiff would be unjustly enriched if he were allowed to cash in the Defendant’s cheque.  I do not see how this would be the case.  The cheques covered the amount the Plaintiff had advanced to the Defendant.  As to any dispute as to liability arising out of the sales contract including that for any outstanding cost of goods sold and delivered or any short delivery of the goods already paid for and breach of condition or warranty, this should, and could still, be raised between OGEL and Wheeler.

CONCLUSION

73.  The Defendant’s evidence of the alleged common intention of conditional delivery of his cheques is inadmissible.

74.  Considering the evidence anyway, I am not satisfied that there was in fact the alleged common intention between the Plaintiff and the Defendant at the time when the cheques were drawn and delivered by the Defendant to the Plaintiff that the operation of the cheques was subject to the alleged conditions precedent.

75.  In the circumstances, the defence to the Plaintiff’s action on the dishonoured cheque must fail.

ORDER

76.  I give judgment in favour of the Plaintiff in the sum of HK$173,000 together with interest thereon at judgment interest rate from 1 September 2000 until payment.

77.  There is no reason why costs should not follow the event.  I make an order nisi that the Plaintiff shall have costs of this action, to be taxed if not agreed, with certificate for counsel.  The Defendant’s own cost shall be taxed in accordance with legal aid regulations.